Introduction
to International Trading Club
Forex Foreign
Exchange Currencies Market

. . .
As with many financial markets there are many derivatives of the
central market such as futures, options and forwards.
For now we will only discuss the main market or as sometimes
referred to "Spot or Cash market." aka Forex Market.
For additional Forex Market knowledge you will find a good forex trading guide very
helpful in understanding and trading forex markets.

The word FOREX is derived from Foreign Exchange and
is the largest financial market in the world. Unlike
many markets the FX market is open 24-hrs per day
and has well over 1 Trillion US Dollars in trading volume
every day. This tremendous trading activity is more than the combined
turnover of all the world's stock markets on any given
day combined. This tends to lead to a very liquid market and
thus a desirable market to trade.

Late Breaking Financial News

Unlike many other trading markets (all financial instruments
that can be traded) the FX Forex market does not have a fixed
exchange. It is primarily traded through banks, brokers,
dealers, financial institutions and private individuals.
Forex trades are executed thru phone and increasingly online
via the Internet. It is only in the last few years that
the smaller investor has been able to gain access to
this market. Previously the large amounts of deposits
required precluded the smaller investors. With the advent
of the Internet and growing competition it is now easily
in the reach of most financial traders and investors.

You will often hear the term INTERBANK discussed in
FX terminology. This originally, as the name implies
was simply banks and large institutions exchanging information
about the current rate at which their clients or themselves
were prepared to buy or sell a foreign currency. INTER meaning
between and Bank meaning deposit taking institutions
normally made up of banks, large institution, brokers
or even the government. The currency futures market has moved on to such
a degree now that the term inter bank now means anybody
who is prepared to buy or sell a currency.

It could be two individuals or your local travel agent offering
to exchange Euros for US Dollars. You will however find
that most of the brokers and banks use centralized feeds
to insure reliability of price quotes. The quotes for Bid (buy)
and Offer (sell) will all be from reliable sources.
These quotes are normally made up of the top 300 or
so large institutions. This insures that if they place
an order on your behalf that the institutions they have
placed the order with is capable of fulfilling the order.

Although we have discussed orders being fulfilled,
it is estimated that anywhere from 70%-90% of the FX
market is speculative and involves day traders. In other words the person or
institution that bought or sold the currency has no
intention of actually taking delivery of the currency.
Instead they were solely speculating on the movement
of that particular currency.

90% of all currencies are traded against the U.S. Dollar.
The four next most traded currencies are the Euro (EUR),
Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc(CHF).
As currencies are traded in pairs and exchanged one
for the other when traded, the rate at which they are
exchanged is called the exchange rate. These four currencies
traded against the US Dollar make up the majority of
the market and are called major currencies or the majors.

Market Mechanics

So now we know that the FX market is the largest in
the world and that your broker or institution that you
are trading with is collecting quotes from a centralized
feed or individual quotes comprising of inter bank rates.
So how are these quotes made up. Well, as we previously
mentioned currencies are traded in pairs and are each
assigned a symbol. For the Japanese Yen it is JPY, for
the Pounds Sterling it is GBP, for Euro it is EUR and
for the Swiss Frank it is CHF. So, EUR/USD would be
Euro-Dollar pair. GBP/USD would be pounds Sterling-Dollar
pair and USD/CHF would be Dollar-Swiss Franc pair and
so on. You will always see the USD quoted first with
few exceptions such as Pounds Sterling, EuroDollar,
Australia Dollar and New Zealand Dollar. The first currency
quoted is called the base currency. Have a look below
for some example.

When you see FX quotes you will actually see two numbers.
The first number is called the bid and the second number
is called the offer (sometimes called the ASK). If we
use the EUR/USD as an example you might see 0.9950/0.9955
the first number 0.9950 is the bid price and is the
price traders are prepared to buy Euros against the
USD Dollar. The second number 0.9955 is the offer price
and is the price traders are prepared to sell the Euro
against the US Dollar. These quotes are sometimes abbreviated
to the last two digits of the currency such as 50/55.
Each broker has its own convention and some will quote
the full number and others will show only the last two.
You will also notice that there is a difference between
the bid and the offer price and that is called the spread.
For the four major currencies the spread is normally
5 give or take a pip (will explain pips later)

To carry on from the symbol conventions and using our
previous EUR quote of 0.9950 bid, that means that 1
Euro = 0.9950 US Dollars. In another example if we used
the USD/CAD 1.4500 that would mean that 1 US Dollar
= 1.4500 Canadian Dollars.

The most common increment of currencies is the PIP.
If the EUR/USD moves from 0.9550 to 0.9551 that is one
Pip. A pip is the last decimal place of a quotation.
The Pip or POINT as it is sometimes referred to depending
on context is how we will measure our profit or loss.

As each currency has its own value it is necessary
to calculate the value of a pip for that particular
currency. We also want a constant so we will assume
that we want to convert everything to US Dollars. In
currencies where the US Dollar is quoted first the calculation
would be as follows.

Example JPY rate of 116.73 (notice the JPY only goes
to two decimal places, most of the other currencies
have four decimal places)

In the case of the JPY 1 pip would be .01 therefore

USD/JPY: (.01 divided by exchange rate = pip value)
so .01/116.73=0.0000856 it looks like a big number but
later we will discuss lot (contract) size.

In the case where the US Dollar is not quoted first
and we want to get to the US Dollar value we have to
add one more step.

EUR/USD: (0.0001 divided by exchange rate = pip value)
so .0001/0.9887 = EUR 0.0001011 but we want to get back
to US Dollars so we add another little calculation which
is EUR X Exchange rate so 0.0001011 X 0.9887 = 0.0000999
when rounded up it would be 0.0001. Click now for Trading Tip of the Day.

GBP/USD: (0.0001 divided by exchange rate = pip value)
so 0.0001/1.5506 = GBP 0.0000644 but we want to get
back to US Dollars so we add another little calculation
which is GBP X Exchange rate so 0.0000644 X 1.5506 =
0.0000998 when rounded up it would be 0.0001.

By this time you might be rolling your eyes back and thinking do I really need to work all this out and the
answer is no. Nearly all the brokers you will deal with
will work all this out for you. They may have slightly
different conventions but it is all done automatically.
It is good however for you to know how they work it
out. In the next section we will be discussing how these
seemingly insignificant amounts can add up.